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Author Archive: Gary Kinman

Bill Gates' final day as an employee of Microsoft was June 27, 2008. Let's all raise our virtual glasses in a toast! Or maybe a virtual fist-bump is better - here you go: III!

I had intended to type this up in time for Mr. Gates' last day, but just simply didn't have time. This marks a historic change at the software behemoth in Washington. Love him or hate him (and there are many people on each side), few people truly realize the impact he has had on the world as we know it.

I love the fact that in America, you can get a crazy and creative idea and run with it. Gates realized that Intel's 8080 chip released in April 1974 was the first affordable chip that could run BASIC in a computer that could be small enough to be classified as a "personal" computer. Then he read an article in the January '75 issue of Popular Electronics about a microcomputer called the Altair 8800 made by Micro Instrumentation and Telemetry Systems (MITS), which ran on an Intel 8080. Realizing that he had to seize the moment because the timing would never be right again, Gates took a leave of absence as a student at Harvard and contacted MITS about developing a BASIC interpreter for that machine. He collaborated with Paul Allen to prepare demo software and close the deal, then he and Paul Allen formed a company named "Micro-soft." The hyphen was dropped in 1976.

Can we imagine what our world would be like had Gates missed reading that magazine in January ‘75? Or if he had decided to finish school and become a lawyer as his parents had hoped? I can't imagine what technology I'd be using to produce documents like this today if Gates and Allen didn't follow through on their crazy idea in 1975.

To get an idea of how deeply Bill Gates has influenced us today, just try either running a business or doing your job without interacting with a computer. If it's not impossible, it's very very difficult at best. Next, try running the computers for your business without ANY Microsoft products. Again, this is difficult but not totally impossible. Then, try interacting with other businesses that use Microsoft products. If you're then successful doing that, think of how many of your daily activities involve a Microsoft product.

I actually worked for a boss in the mid-90's who hated Microsoft. He ran IBM OS/2 operating systems and non-Microsoft applications (Word Perfect, Quattro Pro spreadsheets, etc.). He didn't want to be reminded that Gates originally helped develop OS/2 in partnership with IBM. When IBM dropped support for OS/2, my boss capitulated and migrated to Windows.

At SoftLayer, we use and support a lot of non-Microsoft products. But we couldn't do what we do today without Microsoft products, and many of our customers demand Microsoft products.
In typical American entrepreneurial fashion, SoftLayer started with some semi-crazy ideas to connect the dots between different products in creative ways that had not been previously done. We will do well to have a fraction of the impact that Bill Gates has made.

One of the hot topics over the past couple of weeks in our growing industry has been how to minimize downtime should your (or your host’s) data center experience catastrophic failure leading to outages that could span multiple days.

Some will think that it is the host’s responsibility to essentially maintain a spare data center into which they can migrate customers in case of catastrophe. The reason we don’t do this is simple economics. To maintain this type of redundancy, we’d need to charge you at least double our current rates. Because costs begin jumping exponentially instead of linearly as extensive redundancy is added, we’d likely need to charge you more than double our current rates. You know what? Nobody would buy at that point. It would be above the “reservation price” of the market. Go check your old Econ 101 notes for more details.

Given this economic reality, we at SoftLayer provide the infrastructure and tools for you to recover quickly from a catastrophe with minimal cost and downtime. But, every customer must determine which tools to use and build a plan that suits the needs of the business.

One way to do this is to maintain a hot-synched copy of your server at a second of our three geographically diverse locations. Should catastrophe happen to the location of your server, you will stay up and have no downtime. Many of you do this already, even keeping servers at multiple hosts. According to our customer surveys, 61% of our customers use multiple providers for exactly that reason – to minimize business risk.

Now I know what you’re thinking – “why should I maintain double redundancy and double my costs if you won’t do it?” Believe me, I understand this - I realize that your profit margins may not be able to handle a doubling of your costs. That is why SoftLayer provides the infrastructure and tools to provide an affordable alternative to running double infrastructure in multiple locations in case of catastrophe.

SoftLayer’s eVault offering can be a great cost effective alternative to the cost of placing servers in multiple locations. Justin Scott has already blogged about the rich backup features of eVault and how his backup data is in Seattle while his server is in Dallas, so I won’t continue to restate what he has already said. I will add that eVault is available in each of our data centers, so no matter where your server is at SoftLayer, you can work with your sales rep to have your eVault backups in a different location. Thus, for prices that are WAY lower than an extra server (eVault starts at $20/month), you can keep near real-time backups of your server data off site. And because the data transfer between locations happens on SoftLayer’s private network, your data is secure and the transfer doesn’t count toward your bandwidth allotment.

So let’s say your server is in our new Washington DC data center and your eVault backups are kept in one of our Dallas data centers. A terrorist group decides to bomb data centers in the Washington DC area in an attempt to cripple US government infrastructure and our facility is affected and won’t be back up for several days. At this point, you can order a server in Dallas, and once it is provisioned in an hour or so, you restore the eVault backup of your choice, wait on DNS to propagate based on TTL, and you’re rolling again.

Granted, you do experience some downtime with this recovery strategy. But the tradeoff is that you are up and running smoothly after the brief downtime at a cost for this contingency that begins at only $20 per month. And when you factor in your SLA credit on the destroyed server, this offsets the cost of ordering a new server, so the cost of your eVault is the only cost of this recovery plan.

This is much less than doubling your costs with offsite servers to almost guarantee no downtime. The reason that I throw in the word “almost” is that if an asteroid storm takes out all of our locations and your other providers’ locations, you will experience downtime. Significant downtime.

With Skinman blogging about outsourcing (here, here, and here) along with Michael Miller blogging about the ease of leasing vs. buying, I had to jump in to say that the numbers show that their thinking is right on track.

Using database driving financial modeling software, I modeled a small internet-based business doing their IT infrastructure in-house versus using SoftLayer to handle the infrastructure for them. The benefits of using SoftLayer are eye-popping.

Here are the basic assumptions of the mythical company. There are 8 employees, 2 of which are founders who took out second mortgages on their houses to launch the business. First year sales are about $1.5 million. Business needs require 12 servers in two different geographic locations, housed in climate controlled rooms. Pricing out the servers and networking gear on Dell and eBay worked out to $71,509. This gear was financed with part of the proceeds from the second mortgages, booked to the balance sheet and depreciated. After three years, it was disposed of and upgraded with new gear costing $125,000.

Using SoftLayer changes several of these assumptions. By letting SoftLayer handle infrastructure, one less employee was required. There was no capital outlay for the needed 12 servers and networking gear. SoftLayer got the servers running in a couple of hours with no setup fees for a manageable monthly charge. This allowed less debt to start the business, and there were no long term contracts with SoftLayer if the business idea didn’t work out. There was no need to book the assets to the balance sheet, depreciate them, and upgrading them after three years involved a simple phone call so SoftLayer. No disposing of old gear or balance sheet write offs were necessary.

Consequently, this improved all the most important financial statement measures besides revenue, which remained the same in each scenario. Gross profit, EBITDA, EBIT, and Net Income all improved dramatically from using SoftLayer. Balance sheet credit worthiness, measured by things like equity and the Current Ratio among other things, dramatically improve. Finally, cash balances and cash flow almost double by using SoftLayer. Just compare the highlighted fields in this spreadsheet.

As they say, “your mileage may vary.” But odds are that you can significantly improve your financial performance by using SoftLayer to eliminate operating costs, depreciation, debt financing, and upgrade logistics related to your IT infrastructure needs.

No this is not skinman taking up more space in the blogosphere – it’s his brother with the uncool and unpronounceable email moniker of gkinman.

My brother thinks he’s the original skinman based on the story of how he became skinman. A former employer in the 90’s got tired of the cutesy email names and demanded that everyone stop using those and act professional and from now on, employees would use the pattern of "first initial followed by last name" without exception. When he first saw the skinman email name, he went ballistic and said “I thought I said no more cutesy email names” to which my brother replied, "that is my first initial and last name."

Sorry to burst his bubble, but the other night, my wife showed me some old documents about my family lineage from my grandmother’s Bible. We wondered if someone had posted our family tree online as so many folks do. Through the wonder of Google, sure enough they had. I won’t bore you with the line of how we link back to this guy but we do, and he really IS the original Skinman.

I think old Seth, the original Skinman, would have made a good SL’er, mostly because of he was an outsourcing entrepreneur. A New York times story from 1885 says that he contracted to supply government troops and sawmill hands with elk meat. He provided 240 elk over 11 months at 25 cents per pound. This handy guide indicates that a typical elk yields about 250 pounds of meat – but read it only if you have a strong stomach or are an avid hunter.

So 240 elk x 250 pounds of meat per elk at 25 cents per pound equals $15,000. In the mid 1800’s this was quite a chunk of change. Do your own calc, but mine shows that this is just north of $6 million in today’s dollars. So ol’ Skinman was quite the successful outsourcing entrepreneur! And he even had a soft layer. Whereas ours today is our software that sits on top of the hardware to virtualize the data center and make your life easier, Seth’s soft layer was the buckskin clothes he always wore.

Fast forward 150 years and you’ll see the Skinman of this era blogging about outsourcing. In my next post, I’ll show you some numbers that show his thinking is right on the money.

Mike Jones and I recently attended a conference, and one of the keynote speakers was Vijay Govindarajan from the Tuck School of Business at Dartmouth. His presentation on business strategy encouraged us to 1) Manage the present, 2) Selectively forget the past, and 3) Create the future.

His main point of emphasis was to be sure that we did not focus so much on the present that we lose touch or else when the future arrives, we’re left behind. Along those lines, he mentioned that there may be some "dead horses" at present in your business. By a dead horse, he means a line of business that at present is declining. So what do you do about these dead horses? A la David Letterman, he gave us a Top 10 List that I’ll pass along to you.

10. Whip the horse a little harder
9. Change the rider
8. Harness several dead horses together for increased speed
7. Emulate the best practices of companies riding dead horses
6. Proclaim that it’s cheaper to feed a dead horse
5. Affirm that "This is the way we have always ridden this horse."
4. Declare that "This horse is not dead."
3. Have the lawyers bring suit against the horse manufacturer
2. Engage a consultant to study the dead horse

And number 1, Promote the dead horse to a senior management position.

At SoftLayer, we try to be all about creating the future. Whether it’s opening up our API’s or adding new features to our portal or opening new geographically diverse data centers or leveraging our geographic diversity to roll out new products and services, we have the future in mind. Yes, you’ll see some new wrinkles once our Virginia data center goes live in a few short weeks. We promise to keep any dead horses from stinking up the place.

Here's a couple of my childhood memories for you. Today, they've been virtualized. And monetized.

Shooting Up the Neighborhood
The kids in my neighborhood would get home from school, crank out the homework and household chores, then bail outdoors in all kinds of weather and play some version of battle games, be it "cops and robbers", "cowboys and Indians", "World War II", etc. In addition to politically incorrect game names, we'd use toy guns and plastic knives and swords to pretend-shoot each other and pretend-hack each other to bits -- all in good fun and while using vocabulary that our parents didn't care for. I'm sure the toy makers made a modest profit from our recreation.

Just last night, my son (age 14) approached me and announced that his homework was done, his room was straight, he was ready for his tests, etc., then asked if he could get on his Xbox 360. After I had him help with the dinner dishes, he headed upstairs much like I would head out the front door when I was 14. I went upstairs a little later and he was logged on to Xbox Live with the voice headset running and he pointed out that about 11 of his hockey teammates were also online and playing Call of Duty 4. So instead of pretend-shooting each other outside in the cold January air, they all get together online and do it. Don’t ask him what kind of language gets used either – it’s probably the same as my generation. From what I understand, the toy makers in this case make a lot more money than those of my youth.

Passing Notes at School
In yet another politically incorrect part of my upbringing, somewhere around 5th and 6th grade, somebody thought it would be a good idea to pass ballots around the classroom. They’d write a question at the top of the page along the lines of “Do you like Gary?” and they’d put two columns below. Other kids would sign under the “yes” or “no” columns depending on how they felt that day.

This is basically virtualized with Facebook, Linked In, and Plaxo. We get prompted to accept others as friends and recommend each other with these networking tools. With all the applications, pictures, messaging and so on these go way beyond our childhood note-passing but the concept is the same. Virtualizing this concept has unlocked untold riches. How much? Microsoft’s investment in Facebook extrapolates the value of Facebook to be $15 billion. That’s a nice chunk of change for virtualizing the passing of notes at school.

All This Virtualization Requires Servers – We’ve Got ‘Em
As I’ve mentioned before, I’m not real good at whiteboarding new ideas. Tell you what – you think of something from childhood that can be virtualized into billions in valuation, and SoftLayer will provide the servers and connectivity you need to achieve it.

The power grids that we enjoy today did not magically appear as power generation developed during the Industrial Revolution. In 1902, according to the US Census, the country had 3,600 central systems and over 50,000 isolated power plants in large homes, hotels, and other commercial establishments. Thus, it’s a pretty safe bet that companies employed a fair amount of people who were tasked with “keeping the lights on.” For our purposes, we’ll call them the Chief Electricity Officers (CEOs).

This was the era before electricity was a utility. As we know, the power grid eventually encompassed the whole country and provided all needed electricity on tap. Once companies found that it was far more economical to plug into the grid than to generate their own power, the poor CEOs had to find other things to do in their organizations. Of course, industry regulation played a part here also, but the basic economics worked – with the grid in place, it was cheaper to buy power than do it yourself.

I see several parallels in this present Information Age. Many companies have Chief Information Officers and/or Chief Technology Officers. Part of what these folks are tasked with is IT infrastructure, i.e., acquiring the computing and networking gear required by the business and operating it in a redundantly powered and cooled data center. In most companies, IT is not the core competency of the business, yet they lay out a lot of capital expenditures and employ a lot of people for an overhead operation – much like what the old CEOs did with independent power generation.

SoftLayer and companies like us parallel the rollout of the power grid which began about a hundred years ago. In the coming years, companies will realize that the time, people, and capital expenditures required to locate data center space, find redundant power, set up backup power, install redundant HVAC systems, expend capital to acquire routers/switches/servers/storage systems/load balancers/firewalls/operating system software, and hire the people to run it all and upgrade everything every few years will be far too great a cost compared to “plugging in” to a provider such as SoftLayer. With Softlayer, IT infrastructure is our core competency. Companies need only give us a shout to instantly have IT infrastructure provided at far better economics than doing it themselves. They’re essentially “plugging in” to IT as a basic utility to be used to perform their core competency – just like they plug into the power receptacle to use electricity to help perform their core competency.

Hey, when Sun Microsystems says they’ll be out of data center operations by 2015, that raises our eyebrows around here. Dan Golding of Tier 1 research concurs that by 2015 “enterprise data centers will be in decline.” Once the business leaders of companies grasp the economics of halting their independent data center operations in favor of plugging in to utility providers, the CIOs and CTOs will have to do what the old CEOs did – find other ways to add value to their companies.

Our CEO said “so when will our next blog post on GAHAP come out?” By GAHAP he means “generally accepted hosting accounting principles.” He asked for it, so you get it :). If GAHAP bores you, try this on your iPhone. It’s fun!

I could probably squeeze everyone left reading at this point in a Dodge Viper and we could discuss this over lunch. But SL doesn’t provide Vipers to executives so I guess I’ll post it here for you. A balance sheet by definition is a snapshot of the current financial condition of a company. Here's a formal definition. A GAAP balance sheet simply doesn’t portray an accurate picture of the financial condition of a hosting company.

Probably the most important value that a GAAP balance sheet completely misses is the value produced by monthly recurring revenue. By implementing some sort of fair value accounting as I mentioned before this value gets captured. But on that part of the balance sheet, it still doesn’t help someone looking at the dreaded current ratio. So here’s a way to get a measure of this value that matches up to current liabilities on the balance sheet and get a current ratio that better reflects the company’s true financial position.

Since current liabilities include debt that must be paid at any time over the next 12 months, I would propose using statistics to walk forward 12 months and add “Future EBITDA from Existing Customers” as a current asset on the balance sheet. I can sense the shudders of all accountants who are reading this because you’re thinking that this completely abandons the revered principle of conservatism. In hosting, however, this can be done with conservatism in mind by employing statistics. Public accounting auditors employ statistics every day in their work, so the use of statistics is not a foreign concept to accountants.

Here’s how I’d propose hosting companies do this. First, look at the behavior of the current customer base at the beginning of each month regarding customer churn and the purchase of incremental business by remaining customers. Ignore all new customers acquired during the month and add them to the customer base for next month’s analysis. For each month over the past 12 months, analyze how much revenue is lost from customers who leave and net that from how much revenue is recognized from the existing customers who remain. The results of this analysis can be statistically boiled down to give you an idea of how much revenue will come in over the next 12 months even if you do not gain a single new customer during the next 12 months. That’s the principle of conservatism coming into play here. Let’s call this “statistically stable anticipated revenue.” By the way, at SoftLayer, the incremental business from customers who stay is greater than the business lost from customers who leave us.

Second, take a look at EBITDA margins over the past 12 months and work the statistical mojo to get an idea of EBITDA margins going forward. Multiply this margin against the statistically stable anticipated revenue to arrive at “Future EBITDA from Existing Customers.”

Third, add this category as a new line in the Current Assets portion of the balance sheet as well as adding it as a new line in the Stockholder’s Equity portion of the balance sheet. The resulting balance sheet is much closer to the true financial condition of a hosting company than a traditional GAAP balance sheet.

Why is this view more accurate? 1) A hosting company isn’t like a retail store. Like a hosting company, retail stores have repeat customers but the repeat behavior is more sporadic. The customer may decide that the weather is too bad and they’ll run out and get that new pair of shoes another day. Or the weekend may have been too hectic for a grocery store run so they’ll eat out for the next week. With hosting customers, mission-critical things live on their servers and they are usually set up on automatic monthly billings. Repeat sales are much more predictable than for customers of retail stores. This consistent cash flow has real value, and to not capture it on the balance sheet negatively distorts the financial condition of the company. 2) Putting this statistically solid future EBITDA as a current asset allows a better picture of the current ratio because it is from this EBITDA that the current portion of the company’s debt will be paid. This gives a banker, etc., a clear view of whether the company will struggle over the next year to pay them back.

Here’s how a sample summary balance sheet would look before and after this adjustment.

Over the years I've had a chance to see a number of different organizations in operation – churches, non-profits, clubs, public companies, and private companies. I've found that in all these organizations, four types of people are needed in order for them to thrive.

I made this observation of four types of people about 20 years ago. I honestly don't remember reading this from a business book or hearing it at a seminar so I don't have a source to cite. But since there's "nothing new under the sun" according to Ecclesiastes, I apologize in advance if you're reading this and this list originated with you over 20 years ago.

Some may think that comfortable new buildings, plush surroundings, or artistic furnishings can help an organization thrive. I'm reminded of the IBM "Innovation Station" commercial. I couldn't find it on their site and the best I could do elsewhere is this Italian version. The surroundings of the people are merely surface cosmetics. The people are the soul of an organization, and each one has a different mix of gifts and talents. It is this mix of gifts and talents that I sort into four groups and the people of the organization must draw from their fundamental gifts and talents for an organization to thrive, regardless of the environmental cosmetics – especially if this is your environment.

Innovators
The first group of folks is the smallest in number. They're the innovators. They can approach a blank whiteboard, pick up a marker and brilliance flows through them onto the board. They're so in touch with markets that they don't just sense the needs felt by the market that need to be filled – they know the needs of the market before the market even feels these needs. The innovators cast the vision for what can be. However, if you ask them to make the vision better, deliver the vision, or maintain it after delivery, more often than not the vision will not be realized because making the vision reality is not a part of their gifts and talents. Making the vision a reality depends on folks from the other groups.

Refiners
These are some of the folks who approach a blank whiteboard and they pick up a marker, but the board remains white. It isn't within them to come up with new and innovative solutions to market needs. But if there's a new and innovative idea on the board, they'll grab a marker and make it better. Maybe the original idea has a logistical problem that keeps it from being viable. They'll solve that logistical problem. Maybe a proposed process is inefficient – they eliminate the bottlenecks. They perhaps can put together a great project plan and GANTT chart. But if you ask them to deliver the project or maintain it in a production environment, you may see failure and frustration. This is where the next groups come to the rescue.

Deliverers
Hail to the Project Managers here. These are the folks that can take a new idea that's been boiled down into a viable plan, marshal the troops, juggle dependencies, assign resources, balance budgets, tackle key tasks personally, hit deadlines, and declare victory when the idea is a reality. Project Managers also need some deliverers to work for them. These are the folks that gobble up a chunk of work on the project plan, put their nose to the grindstone, complete the task, and then return for more. But after the victory party to celebrate successful delivery, asking them to go to the whiteboard and think of something new or asking them to keep what they delivered up and running may be unproductive.

Maintainers
These are the folks that hate to see things break down. Their greatest joy is to do things over and over to keep production up and running and on pace. They love checklists, routine tests, and a predictable work day. I once worked as an automobile insurance underwriter, which is a fancy way to say that I sat at a desk and processed one application after another all day long, day after day, entering data and rating risks. I lasted about a year. This isn't part of my gifts or talents, and I gained a whole new level of respect for this group of people. Without them, the organization breaks down and ceases to function. And as anyone in hosting knows, keeping systems up and running is a key fundamental of the business. The coolest new features don't matter a bit if there's no electricity in the data center.

Dangers of "Pigeonholing"
An organization needs to know which category their folks are fulfilling in their current roles. But in reality, people often have gifts and talents that lend themselves to more than one of these groups. A smart organization will recognize this and allow people to grow and develop rather than sticking them in one spot forever. For example, I'm about equal parts Refiner and Deliverer, and don't ask me to innovate or maintain – you'll be sorry. I'll do best in a role that requires both refining and delivering. When an organization pigeonholes its people, they'll only keep the people so long. They have a way of leaving to find organizations with more fulfilling opportunities.

I can find all four of these groups here at SoftLayer. We also allow some crossover into the functions of other groups. We've found that a good number of our Deliverers are also good Innovators for example. Consequently, as a company, we've lost a grand total of three employees since our beginning.

For the two people who actually read my posts, you know that I blogged about how I look at the value of a server. Basically, it should be valued by the cash flow it produces. Without a customer to use the server, the cash flow it generates is negative, i.e., less than $0 due to the costs of keeping it racked up, powered up, and connected.

So, how do you place a value on a customer? Customers and servers are not a one-to-one connection because many customers have more than one server. They also buy more than just servers, such as additional software and/or backup services.

Like most of us in the industry, I spend a few minutes each day scrolling through the customer forums, both ours and 3rd party sites – you probably know which ones :). I look at the customer comments and sometimes I wonder if the folks in our industry understand the value of these customers judging from the way some customers are treated.

Granted, some customers are abusive and need to be fired, so to speak. Others appear to be high value customers with multiple servers and solid business models where someone has dropped the ball and caused them to seek greener hosting pastures. If companies understood the dollar figure valuation of each customer, they might think twice about their next course of action with a particular customer.

To value a customer, I look at the statistical expectation of how long that customer will stay with the company, how much the customer currently buys with us, the statistical expectation of how much additional business they will place with us, the gross profit generated by the customer, and that old stand-by -- the minimum acceptable rate of return for an investor in the company. From these data points, I do a simple Present Value calculation and arrive at the value of the customer, which is the amount of cash that would have to be invested to yield the economic equivalent of the expected gross profit that the customer will produce. I'd give you a sample calculation, but a) it would make this post even more boring, and 2) some things we like to keep secret :).

This is important because it can make the growth of a hosting company less "slippery" -- sort of like when Eric takes off from a red light in this:

For example, if you sell 100 new servers but customers release 90 back to you during the same period, your growth doesn't have the traction it would have if only 10 servers were released back to you. By retaining valuable customers, you don't spin your wheels as much. Spinning the tires at a hosting company is not nearly as much fun as watching Eric drive.